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EC221 Individual Report

CORPORATE ANALYSIS OF BRITISH AMERICAN TOBACCO

Table of Contents INTRODUCTION .................................................................................................................................... 2 ANALYSIS ............................................................................................................................................. 3

LIQUIDITY RATIOS ................................................................................................................. 3 Current Ratios. ............................................................................................................... 3 Acid test Ratios ............................................................................................................. 3 Operating Cash Flow to Current Liabilities ................................................................. 4

PROFITABILITY RATIOS ......................................................................................................... 5 Gross Profit Margin ....................................................................................................... 5 Operating Profit Margin ................................................................................................ 6 Net profit Margin ............................................................................................................ 6 Return on Capital Employed. ....................................................................................... 7 Return on Equity ............................................................................................................ 7 Cash Return on Capital Employed. .............................................................................. 8

EFFICIENCY RATIOS .............................................................................................................. 9 Inventory Turnover ........................................................................................................ 9 Receivables turnover .................................................................................................... 9 Payables Turnover ...................................................................................................... 10

GEARING RATIOS ................................................................................................................ 11 Debt to Equity Ratio .................................................................................................... 11 Interest Cover Ratio .................................................................................................... 12

CONCLUSION ..................................................................................................................................... 13 REFERENCES ..................................................................................................................................... 14 APPENDICES ...................................................................................................................................... 15

APPENDIX 1 ........................................................................................................................ 15 2017-2016 Financial Data ............................................................................................ 15 2017-2016 Relevant Notes .......................................................................................... 18 2015-2014 Financial Data ............................................................................................ 19 2015-2014 Relevant Notes .......................................................................................... 22 2013 Financial Data ..................................................................................................... 23 2013 Relevant Notes .................................................................................................... 26

APPENDIX 2 ........................................................................................................................ 27 Financial Ratio Calculations ....................................................................................... 27 Industry Averages ....................................................................................................... 35

APPENDIX 3 ........................................................................................................................ 36 British American Tobacco’s Expansion Efforts ....................................................... 36

Introduction This report aims to develop an understanding of the corporate performance of British American Tobacco (hereafter noted as BAT), the worlds 3rd largest tobacco company (Passport, 2018a). A sufficient examination of BAT’s past five fiscal years will provide the transparency needed for potential acquirers to make their evaluations. “Financial ratios have little significance in isolation” (Watson & Head, 2009 p.47), therefore, averages of BAT’s three biggest competitors will contribute to this report as a comparison; Philip Morris International Inc., Imperial Brands PLC, and Japan Tobacco (see Appendix 2). China National Tobacco Corporation (CNTC), although holding the biggest global share (45.3%) of the tobacco industry (IBIS World, 2018a), will be excluded from this report due to the inaccessibility of their financial accounts.

Analysis

Liquidity Ratios According to Goel (2016, p.19) the primary purpose of liquidity ratios is to provide information about a firm’s ability to adhere to short-term financial obligations. Current Ratios measure a company’s ability to pay current liabilities with their current assets.

Figure 1 shows that BAT has had a current ratio greater than one from 2013-2016. However, in 2017 BAT’s current ratio decreased to 0.9 indicating that they may not have the current assets available to pay their short-term financial obligations. The current ratio is taken from the balance sheet that only shows a snapshot of the company’s financial position at any given time, thus, when analysing this ratio conclusions are limited. The main observation to make from comparing the industry benchmark and BAT’s current ratios is that there is no correlation. Acid test Ratios are similar to the current ratios; however, they exclude inventory, which may be difficult to quickly liquidate and arguably not classed as a current asset.

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Figure 1: Current Ratio Over Five Fiscal Years

BAT Benchmark

Figure 2 would indicate that four of the leading companies in the tobacco industry cannot pay their short-term liabilities with current assets. Further research into the tobacco industry shows that the acid test ratio is redundant for many reasons. Firstly, due to the historical nature of the balance sheet and the large volume of units sold by companies in this industry. At any point in time the current assets will change significantly because of the high sales volume. For example, in the 2018 fiscal year BAT sold, 3.9 billion pouches of snus, 189 million vapour units, and 451 billion cigarettes (BAT, 2018). Secondly, Figure 10 (p.9) shows that the industry average does sell its inventory within one year, therefore classifying inventory as a current asset. Operating Cash Flow to Current Liabilities helps potential acquirers understand how well a company can deal with current liabilities in the short term from their net operational cash flows.

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Figure 3: Operating Cash Flow to Current Liabilities Over Five Fiscal Years

BAT Benchmark

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Figure 2: Acid Test Ratio Over Five Fiscal Years

BAT Benchmark

The most obvious finding from Figure 3 is that BAT’s ability to pay its liabilities with its cash flow is usually greater than the industry average, with 2017 being the only recent year that it has a lower ratio. Technically all of the tobacco companies presented in Figure 3 do not generate enough cash to pay off their current liabilities, however this does not necessarily mean they have poor financial health. From tobacco industry analysis it is clear that in recent years there has been large investments into electronic cigarette products as a growing number of consumers switch to a healthier, smokeless tobacco option. For example, BAT launched Vype in August 2013 (Tobacco Tactics, 2018), consequently increasing their liabilities. Profitability Ratios Profitability ratios help to measure how profitable a firm is and how effective their management are regarding generating return (Goel, 2016, p.19) Gross Profit Margin reveals the percentage of revenue after subtracting out the cost of the goods.

BAT’s Gross profit margin is significantly higher than the industry average. BAT may have such a high profit margin for a number of reasons; they have a high market share allowing economies of scale to reduce costs, they produce more higher priced products such as electronic cigarettes allowing a higher price mark-up, and/or they may have higher perceived value based on their corporate image helping them to charge higher prices (Brassington & Pettit, 2013, pp. 255).

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Figure 4: Gross Profit Margin Over Five Fiscal Years

BAT Benchmark

Operating Profit Margin measures the percentage of revenue after deducting all costs associated with the operating activities. Operating costs include raw materials and wages but excludes interest or tax.

Figure 5 shows the difference between BAT and the benchmark has been closed by an average of 24.9% from the gross profit margin. This indicates that BAT has larger operational costs (see appendix 2). This may be due to BAT having a bigger organisation, with 55 factories in 48 countries (BAT, 2019a). Despite this reduction, BAT still has a significantly larger operating profit margin, which is attractive to potential acquirers. Net profit Margin is the percentage of revenue that is net profit.

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Figure 5: Operating Profit Margin Over Five Fiscal Years

BAT Benchmark

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Figure 6: Net Profit Margin Over Five Fiscal Years

BAT Benchmark

The first thing to mention when looking at Figure 6 is the large spike that BAT has in 2017. This is due to their acquisition of Reynolds American in July of 2017 (BAT, 2017). This is significant knowledge for a potential acquirer, however, it should be seen as an anomaly because in 2018 BAT’s net profit drops back down from £37,704 million to £6,210 million. In general, BAT has a significantly larger net profit margin than the industry average. Return on Capital Employed measures how efficiently a company generates profits from its capital.

BAT has a lower return on capital employed compared to the average and its ratio is decreasing at a faster rate than the average. This shows that BAT produces less profit per investment in capital than its competitors which could be due to expansion efforts from BAT between 2013 and 2017 (Shown in Appendix 3). These activities increase equity and non-current liabilities, consequently making this ratio decrease. Return on Equity measures how effective management is at creating profits from the company’s assets.

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Figure 7: Return on Capital Employed Over Five Fiscal Years

BAT Benchmark

Figure 8 shows that BAT has a consistently higher and return on equity which is attractive for potential acquirers. BAT is more efficient in transforming equity into profits. Cash Return on Capital Employed provides an evaluation of the cash profits of a company as a proportion to the funding required to generate them.

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Figure 8: Return on Equity Over Five Fiscal Years

BAT Benchmark

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Figure 9: Cash Return on Capital Employed Over Five Fiscal Years

BAT Benchmark

Figure 9 shows that BAT’s cash return on capital employed has been declining from 2013 to 2017. This may suggest that BAT’s ability to run efficiently is decreasing and therefore their ability to turn capital invested into cash profits is declining. In 2017 BAT’s cash return on capital employed falls below the industry average, but again this is most likely due to the large acquisition of Reynold America causing their non- current liabilities and equity to significantly increase and thus decreasing this ratio. Efficiency Ratios Efficiency ratios indicate how well a firm manages its current assets and liabilities (Watson & Head, 2014, p.49) Inventory Turnover shows how long it takes for a company to sell the inventory that it holds.

BAT has a very high inventory turnover rate compared to the industry average, meaning that it takes longer for them to turn their inventory into cash. The difference between BAT and the benchmark may be due to the types of inventories held. For example, it may take longer to convert more expensive e-cigarettes into cash than normal cigarettes which are much cheaper. However, a higher inventory turnover is unattractive as it may suggest overstocking and weaker inventory management. Receivables turnover shows the number of days that it takes for a company to collect money owed. It can give an indication into a company’s credit strategy when lending to customers.

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Figure 10: Inventory Turnover Over Five Fiscal Years

BAT Benchmark

BAT has a high receivables turnover compared to the industry average showing that they might be extending their credit policy too long. On the other hand, a high receivables turnover ratio could suggest that the directors of BAT are manipulating the financial accounts to increase the perceived sales and entice investors. Conversely, it could be possible that BAT genuinely has strong customer relationships and there is enough trust for them to extend their credit periods this long. Payables Turnover measures the rate at which a firm pays off its suppliers and short-term debts.

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Figure 12: Payables Turnover Over Five Fiscal Years

BAT Benchmark

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Figure 11: Receivables Turnover Over Five Fiscal Years

BAT Benchmark

From 2014 to 2015 BAT extended the time it takes to pay its suppliers and again from 2016 to 2017. This can suggest two situations inside BAT. Either they have negotiated longer credit periods with their suppliers, or they are under financial stress. The fact that BAT’s payables turnover increases at different times to the industry average shows that the increase is not due to industry pressures. Gearing Ratios McLaney (2014, p.59) describes gearing ratios as being ‘concerned with the relative sizes of funds provided by share-holders, on the one hand, and by long-term lenders, on the other hand’. The Debt to Equity Ratio presents the degree to which a company funds its business operations by either creditor’s funds (long-term debt) or shareholders’ funds (equity).

The industry benchmark for this ratio is a negative figure. This is because Philip Morris International has a negative debt to equity ratio over the 5 years because they are going through a process of borrowing debt to repurchase shares. This report highlights this as an anomaly, which distorts an accurate comparison between BAT and its peers, therefore, Figure 13 also shows an industry benchmark excluding Philip Morris International. BAT had a larger and increasing debt to equity ratio than the industry average (excluding PMI) from 2013 to 2015 which can be viewed as a riskier investment as leveraging large amounts of debt can mean it is harder to meet interest payments. From 2015 to 2017 Figure 13 shows BAT rapidly decreasing its leveraging, which is due to expansion efforts. This is a promising change for potential acquirers.

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Figure 13: Debt to Equity Ratio Over Five Fiscal Years

BAT Benchmark Benchmark (Ex. PMI)

The Interest Cover Ratio can highlight significant concerns within a business. It shows how easily a company can pay the interest payments on its debt.

BAT has a lower interest cover ratio compared to the industry average meaning that they have less funds to pay the interest payments on their debt. The debt to equity ratio highlighted potential concerns with BAT’s high leverage, and Figure 14 reinforces that. In 2017 BAT can only pay off its interest payments 5.8 times with their operating profit. Whereas the industry average in 2017 is 21.2.

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Figure 14: Interest Cover Ratio Over Five Fiscal Years

BAT Benchmark

Conclusion Conducting a corporate analysis of BAT against its industry peers from 2013 to 2017 presents significant information about BAT’s financial health. There are some financial ratios that show potential warning signs, however, with further research into BAT’s business activities it becomes clear that in these five fiscal years they have been expanding, launching new products and acquiring other companies. These expansionary efforts have had a significant impact on BAT’s profitability and gearing ratios making them as a company seem less desirable then their industry peers. BAT do, however, have much larger profit margins than the industry average and thus show a greater ability to generate returns. With all ratios and industry analysis considered, this report reveals that BAT is a profitable fast-growing company. Yet, it also shows that BAT should be approached with caution by potential acquirers as the recent business activities make their future corporate success relatively uncertain.

References BAT, (2019a) ‘Our Company’ [Online]. Available at: https://www.bat.com/globalcompany [Accessed 21 April 2019] BAT, (2019b) ‘Our History - a timeline’ [Online]. Available at: https://www.bat.com/history [Accessed 27 April 2019] BAT, (2018) ‘2018 key Group statistics’ [Online]. Available at: https://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DO6LMNZV [Accessed 21 April 2019] BAT, (2017) ‘BAT Completes Acquisition of Reynolds’ [Online]. Available at: https://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DOAPKCXS Accessed 21 April 2019 BAT, (2016) ‘British American Tobacco launches glo™ – a new-to-world Tobacco Heating Product – in Japan’ [Online]. Available at: https://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DOAFGKR3 [Accessed 24 April 2019] Brassington, F & Pettitt, S. (2013) Essentials of Marketing. 3rd Ed, Essex: Pearson Education Limited

Goel, S. (2016) Financial Ratios. 1st Ed, New York: Business Expert Press

IBIS World (2018a) ‘Major Companies’ [online]. Available at: http://clients1.ibisworld.co.uk.ezproxy.brighton.ac.uk/reports/gl/industry/majorcompa nies.aspx?entid=440 [Accessed 10 April 2019]

McLaney, E. (2014) Business Finance: Theory and Practice. 10th Ed, Harrow, England: Pearson

Passport (2018a) ‘British American Tobacco Plc in Tobacco (World)’ [online]. Available at: http://www.portal.euromonitor.com.ezproxy.brighton.ac.uk/portal/analysis/tab [Accessed 10 April 2019] Tobacco Tactics (2018) ‘E-cigarettes’ [Online] http://www.tobaccotactics.org/index.php/E-cigarettes [Accessed: 26 November 2018] Watson, D. & Head, A. (2009) Corporate Finance Principles and Practice. 5th Ed, Edinburgh Gate: Pearson Education M.U.A British American Tobacco, (2017) Annual Report and Form 20-F 2017. London: BAT British American Tobacco, (2015) Annual Report 2015. London: BAT British American Tobacco, (2013) Annual Report 2013. London: BAT

Appendices

Appendix 1 2017-2016 Financial Data (British American Tobacco, 2017)

2017-2016 Relevant Notes (British American Tobacco, 2017)

2015-2014 Financial Data (British American Tobacco, 2015)

2015-2014 Relevant Notes (British American Tobacco, 2015)

2013 Financial Data (British American Tobacco, 2013)

2013 Relevant Notes (British American Tobacco, 2013)

Appendix 2 Financial Ratio Calculations

Current Assets

Current Liabilities

Current Ratio

BAT

2013 9,518.00 8,436 1.13 2014 9,132.00 8,769 1.04 2015 9,814.00 9,006 1.09 2016 12,359.00 11,856 1.04 2017 13,966.00 15,544 0.90

Imperial Brands

2013 8,248 10,984 0.75 2014 7,183 7,735 0.93 2015 7,468 9,141 0.82 2016 7,534 10,125 0.74 2017 6,896 10,878 0.63

Philip Morris International

2013 16,852.00 17,066.00 0.99 2014 15,484.00 15,112.00 1.02 2015 15,804.00 15,386.00 1.03 2016 17,608.00 16,467.00 1.07 2017 21,594.00 15,962.00 1.35

Japan Tobacco Inc.

2013 1,210,552.00 1,112,867.00 1.09 2014 1,696,507.00 1,360,098.00 1.25 2015 1,795,313.00 1,265,920.00 1.42 2016 1,605,169.00 1,356,574.00 1.18 2017 1,705,370.00 1,478,623.00 1.15

Current Assets

Inventory

Current Liabilities

Acid Test

BAT

2013 9,518.00 4,042.00 8,436 0.65 2014 9,132.00 4,133.00 8,769 0.57 2015 9,814.00 4,247.00 9,006 0.62 2016 12,359.00 5,793.00 11,856 0.55 2017 13,966.00 5,864.00 15,544 0.52

Imperial Brands

2013 8,248 3,239.00 10,984 0.46 2014 7,183 2,875.00 7,735 0.56 2015 7,468 2,842.00 9,141 0.51 2016 7,534 3,498.00 10,125 0.40 2017 6,896 3,604.00 10,878 0.30

Philip Morris International

2013 16,852.00 9,846.00 17,066.00 0.41

2014 15,484.00 8,592.00 15,112.00 0.46 2015 15,804.00 8,473.00 15,386.00 0.48 2016 17,608.00 9,017.00 16,467.00 0.52 2017 21,594.00 8,806.00 15,962.00 0.80

Japan Tobacco Inc.

2013 1,210,552.00 473,042.00 1,112,867.00 0.66 2014 1,696,507.00 587,849.00 1,360,098.00 0.82 2015 1,795,313.00 563,820.00 1,265,920.00 0.97 2016 1,605,169.00 558,846.00 1,356,574.00 0.77 2017 1,705,370.00 612,954.00 1,478,623.00 0.74

Net Cash Flows from Operating Activities

Current Liabilities

Operating Cash Flow to Current Liabilities

BAT

2013 4,436.00 8,436 0.53 2014 3,716.00 8,769 0.42 2015 4,720.00 9,006 0.52 2016 4,610.00 11,856 0.39 2017 5,347.00 15,544 0.34

Imperial Brands

2013 2,352.00 10,984 0.21 2014 2,502.00 7,735 0.32 2015 2,747.00 9,141 0.30 2016 3,157.00 10,125 0.31 2017 3,065.00 10,878 0.28

Philip Morris

International

2013 10,135.00 17,066.00 0.59 2014 7,739.00 15,112.00 0.51 2015 7,865.00 15,386.00 0.51 2016 8,077.00 16,467.00 0.49 2017 8,912.00 15,962.00 0.56

Japan Tobacco

Inc.

2013 466,608.00 1,112,867.00 0.42 2014 543,696.00 1,360,098.00 0.40 2015 468,432.00 1,265,920.00 0.37 2016 376,549.00 1,356,574.00 0.28 2017 419,212.00 1,478,623.00 0.28

Gross Profit

Sales

Gross Profit Margin

BAT

2013 11,912.00 15,260.00 78.1% 2014 10,883.00 13,971.00 77.9% 2015 9,887.00 13,104.00 75.5% 2016 10,974.00 14,751.00 74.4% 2017 15,772.00 20,292.00 77.7%

Imperial Brands

2013 5,529.00 28,269.00 19.6% 2014 5,181.00 26,460.00 19.6% 2015 5,171.00 25,289.00 20.4% 2016 5,956.00 27,634.00 21.6% 2017 6,427.00 30,247.00 21.2%

Philip Morris

International

2013 20,807.00 80,029.00 26.0% 2014 19,331.00 80,106.00 24.1% 2015 17,429.00 73,908.00 23.6% 2016 17,294.00 74,953.00 23.1% 2017 18,316.00 78,098.00 23.5%

Japan Tobacco

Inc.

2013 1,220,804.00 2,120,196.00 57.6% 2014 1,197,208.00 2,019,745.00 59.3% 2015 1,332,828.00 2,252,884.00 59.2% 2016 1,270,854.00 2,143,287.00 59.3% 2017 1,296,094.00 2,139,653.00 60.6%

Operating Profit

Sales

Operating Profit Margin

BAT

2013 5,526 15,260.00 36.2% 2014 4,546 13,971.00 32.5% 2015 4,557 13,104.00 34.8% 2016 4,655 14,751.00 31.6% 2017 6,476 20,292.00 31.9%

Imperial Brands

2013 1,958.00 28,269.00 6.93% 2014 2,019.00 26,460.00 7.63% 2015 1,988.00 25,289.00 7.86% 2016 2,229.00 27,634.00 8.07% 2017 2,278.00 30,247.00 7.53%

Philip Morris

International

2013 13,515.00 80,029.00 16.9% 2014 11,702.00 80,106.00 14.6% 2015 10,623.00 73,908.00 14.4% 2016 10,815.00 74,953.00 14.4% 2017 11,503.00 78,098.00 14.7% 2013 532,360.00 2,120,196.00 25.1% 2014 499,880.00 2,019,745.00 24.7%

Japan Tobacco

Inc.

2015 565,229.00 2,252,884.00 25.1% 2016 593,239.00 2,143,287.00 27.7% 2017 561,101.00 2,139,653.00 26.2%

Net Profit

Sales

Net Profit Margin

BAT

2013 4,199.00 15,260.00 27.5% 2014 3,393.00 13,971.00 24.3% 2015 4,522.00 13,104.00 34.5% 2016 4,839.00 14,751.00 32.8% 2017 37,704.00 20,292.00 186%

Imperial Brands

2013 961.00 28,269.00 3.40% 2014 1445.00 26,460.00 5.46% 2015 1723.00 25,289.00 6.81% 2016 669.00 27,634.00 2.42% 2017 1447.00 30,247.00 4.78%

Philip Morris

International

2013 8,576.00 80,029.00 10.7% 2014 7,493.00 80,106.00 9.4% 2015 6,873.00 73,908.00 9.3% 2016 6,967.00 74,953.00 9.3% 2017 6,035.00 78,098.00 7.7%

Japan Tobacco

Inc.

2013 351,518.00 2,120,196.00 16.6% 2014 368,626.00 2,019,745.00 18.3% 2015 490,242.00 2,252,884.00 21.8% 2016 425,773.00 2,143,287.00 19.9% 2017 396,749.00 2,139,653.00 18.5%

Operating Profit

Equity

Non-Current Liabilities

Return on Capital Employed

BAT

2013 5,526 6,935.00 11,510.00 0.30 2014 4,546 5,814.00 11,584.00 0.26 2015 4,557 5,032.00 17,477.00 0.20 2016 4,655 8,406.00 19,511.00 0.17 2017 6,476 61,026.00 64,468.00 0.05

Imperial Brands

2013 1,958.00 5639.00 11,645.00 0.11 2014 2,019.00 5463.00 12,693.00 0.11 2015 1,988.00 5696.00 15,297.00 0.09

2016 2,229.00 5742.00 16,862.00 0.10 2017 2,278.00 6226.00 13,886.00 0.11

Philip Morris

International

2013 13,515.00 -6,274.00 27,376.00 0.64 2014 11,702.00 -11,203.00 31,278.00 0.58 2015 10,623.00 -11,476.00 30,046.00 0.57 2016 10,815.00 -10,900.00 31,284.00 0.53 2017 11,503.00 -10,230.00 37,236.00 0.43

Japan Tobacco

Inc.

2013 532,360.00 1,892,012.00 847,658.00 0.19 2014 499,880.00 2,622,503.00 722,106.00 0.15 2015 565,229.00 2,521,524.00 770,790.00 0.17 2016 593,239.00 2,528,041.00 859,759.00 0.18 2017 561,101.00 2,842,027.00 900,833.00 0.15

Net Profit

Equity

Return on Equity

BAT

2013 4,199.00 6,935.00 0.61 2014 3,393.00 5,814.00 0.58 2015 4,522.00 5,032.00 0.90 2016 4,839.00 8,406.00 0.58 2017 37,704.00 61,026.00 0.62

Imperial Brands

2013 961.00 5639.00 0.17 2014 1445.00 5463.00 0.26 2015 1723.00 5696.00 0.30 2016 669.00 5742.00 0.12 2017 1447.00 6226.00 0.23

Philip Morris

International

2013 8,576.00 -6,274.00 -1.37 2014 7,493.00 -11,203.00 -0.67 2015 6,873.00 -11,476.00 -0.60 2016 6,967.00 -10,900.00 -0.64 2017 6,035.00 -10,230.00 -0.59

Japan Tobacco

Inc.

2013 351,518.00 1,892,012.00 0.19 2014 368,626.00 2,622,503.00 0.14 2015 490,242.00 2,521,524.00 0.19 2016 425,773.00 2,528,041.00 0.17 2017 396,749.00 2,842,027.00 0.14

Cash Flows from Operating Activities ÷

Equity

+ Non-Current Liabilities =

Cash Return on Capital Employed

BAT 2013 5,366.00 6,935.00 11,510.00 0.29 2014 4,634.00 5,814.00 11,584.00 0.27

2015 5,400.00 5,032.00 17,477.00 0.24 2016 4,893.00 8,406.00 19,511.00 0.18 2017 6,119.00 61,026.00 64,468.00 0.05

Imperial Brands

2013 3,120.00 5639.00 11,645.00 0.18 2014 2,832.00 5463.00 12,693.00 0.16 2015 2,827.00 5696.00 15,297.00 0.13 2016 3,420.00 5742.00 16,862.00 0.15 2017 3,568.00 6226.00 13,886.00 0.18

Philip Morris

International

2013 -2,407.00 -6,274.00 27,376.00 -0.11 2014 -2,407.00 -11,203.00 31,278.00 -0.12 2015 5,389.00 -11,476.00 30,046.00 0.29 2016 1,490.00 -10,900.00 31,284.00 0.07 2017 3,762.00 -10,230.00 37,236.00 0.14

Japan Tobacco

Inc.

2013 569,804.00 1,892,012.00 847,658.00 0.21 2014 707,703.00 2,622,503.00 722,106.00 0.21 2015 581,310.00 2,521,524.00 770,790.00 0.18 2016 555,557.00 2,528,041.00 859,759.00 0.16 2017 531,587.00 2,842,027.00 900,833.00 0.14

Inventory

Cost of Sales

X 365 =

Cash Return on Capital Employed

BAT

2013 4,042.00 3,348.00 440.66 2014 4,133.00 3,088.00 488.52 2015 4,247.00 3,217.00 481.86 2016 5,793.00 3,777.00 559.82 2017 5,864.00 4,520.00 473.53

Imperial Brands

2013 3,239.00 22,740.00 51.99 2014 2,875.00 21,279.00 49.32 2015 2,842.00 20,118.00 51.56 2016 3,498.00 21,678.00 58.90 2017 3,604.00 23,820.00 55.23

Philip Morris

International

2013 9,846.00 10,410.00 345.22 2014 8,592.00 10,436.00 300.51 2015 8,473.00 9,365.00 330.23 2016 9,017.00 9,391.00 350.46 2017 8,806.00 10,432.00 308.11

Japan Tobacco

Inc.

2013 473,042.00 899,392.00 191.97 2014 587,849.00 822,538.00 260.86 2015 563,820.00 920,056.00 223.68 2016 558,846.00 872,433.00 233.80

2017 612,954.00 872,433.00 265.22

Trade Receivables

Sales

X 365 =

Receivables Turnover

BAT

2013 2,208.00 15,260.00 52.81 2014 2,071.00 13,971.00 54.11 2015 2,355.00 13,104.00 65.60 2016 2,696.00 14,751.00 66.71 2017 3,306.00 20,292.00 59.47

Imperial Brands

2013 2,899.00 28,269.00 37.43 2014 2,761.00 26,460.00 38.09 2015 2,454.00 25,289.00 35.42 2016 2,671.00 27,634.00 35.28 2017 2,539.00 30,247.00 30.64

Philip Morris

International

2013 3,853.00 80,029.00 17.57 2014 4,004.00 80,106.00 18.24 2015 2,778.00 73,908.00 13.72 2016 3,499.00 74,953.00 17.04 2017 3,738.00 78,098.00 17.47

Japan Tobacco

Inc.

2013 387,837.00 2,120,196.00 66.77 2014 448,402.00 2,019,745.00 81.03 2015 406,387.00 2,252,884.00 65.84 2016 396,934.00 2,143,287.00 67.60 2017 431,199.00 2,139,653.00 73.56

Trade Payables

Cost of Sales

X 365 =

Payables Turnover

BAT

2013 814.00 3,348.00 88.74 2014 764.00 3,088.00 90.30 2015 1056.00 3,217.00 119.81 2016 1281.00 3,777.00 123.79 2017 2298.00 4,520.00 185.57

Imperial Brands

2013 7,303.00 22,740.00 117.22 2014 6,957.00 21,279.00 119.33 2015 6,795.00 20,118.00 123.28 2016 7,991.00 21,678.00 134.55 2017 8,104.00 23,820.00 124.18 2013 1,274.00 10,410.00 44.67 2014 1,242.00 10,436.00 43.44

Philip Morris

International

2015 1,289.00 9,365.00 50.24 2016 1,666.00 9,391.00 64.75 2017 2,242.00 10,432.00 78.44

Japan Tobacco

Inc.

2013 312,741.00 899,392.00 126.92 2014 419,764.00 822,538.00 186.27 2015 373,032.00 920,056.00 147.99 2016 377,933.00 872,433.00 158.12 2017 395,733.00 872,433.00 171.23

Long-Term Debt

Equity

Debt to Equity

BAT

2013 11,510.00 6,935.00 1.66 2014 11,584.00 5,814.00 1.99 2015 17,477.00 5,032.00 3.47 2016 19,511.00 8,406.00 2.32 2017 64,468.00 61,026.00 1.06

Imperial Brands

2013 7,857.00 5639.00 1.39 2014 9,462.00 5463.00 1.73 2015 12,250.00 5696.00 2.15 2016 12,394.00 5742.00 2.16 2017 10,196.00 6226.00 1.64

Philip Morris

International

2013 24,023.00 -6,274.00 -3.83 2014 26,929.00 -11,203.00 -2.40 2015 25,250.00 -11,476.00 -2.20 2016 25,851.00 -10,900.00 -2.37 2017 31,334.00 -10,230.00 -3.06

Japan Tobacco

Inc.

2013 270,399.00 1,892,012.00 0.14 2014 101,001.00 2,622,503.00 0.04 2015 215,938.00 2,521,524.00 0.09 2016 339,036.00 2,528,041.00 0.13 2017 346,955.00 2,842,027.00 0.12

Operating Profits

÷ Interest

= Interest Cover

BAT 2013 5,526 570.00 9.69 2014 4,546 571.00 7.96 2015 4,557 596.00 7.65

2016 4,655 641.00 7.26 2017 6,476 1,114.00 5.81

Imperial Brands

2013 1,958.00 1,463.00 1.34 2014 2,019.00 1,059.00 1.91 2015 1,988.00 1,209.00 1.64 2016 2,229.00 1,984.00 1.12 2017 2,278.00 1,360.00 1.68

Philip Morris International

2013 13,515.00 978.00 13.82 2014 11,702.00 1,068.00 10.96 2015 10,623.00 1,045.00 10.17 2016 10,815.00 1,052.00 10.28 2017 11,503.00 1,050.00 10.96

Japan Tobacco Inc.

2013 532,360.00 8,703.00 61.17 2014 499,880.00 7,050.00 70.90 2015 565,229.00 3,538.00 159.76 2016 593,239.00 6,788.00 87.40 2017 561,101.00 11,035.00 50.85

Industry Averages The industry averages were calculated by finding the mean average of the financial ratios from Imperial Brands, Philip Morris International and Japan Tobacco Inc. British American Tobacco was not included in the average as that would made the industry average figures closer to that of British American Tobacco’s ratios, making the comparison less effective. 2013 2014 2015 2016 2017 Current Ratio 0.94 1.07 1.09 1.00 1.05 Acid Test Ratio 0.51 0.61 0.65 0.56 0.61 Operating Cash Flow to Current Liabilities 0.41 0.41 0.39 0.36 0.37 Gross Profit Margin 34.4% 34.3% 34.4% 34.6% 35.1% Operating Profit Margin 16.3% 15.7% 15.8% 16.7% 16.2% Net Profit Margin 10.2% 11.0% 12.6% 10.5% 10.4% ROCE 0.32 0.28 0.28 0.27 0.23 ROE -0.34 -0.09 -0.03 -0.12 -0.07 Cash Return on Capital Employed 0.09 0.08 0.20 0.13 0.15 Inventory Turnover 196.40 203.56 201.82 214.39 209.52 Receivable Turnover 40.59 45.79 38.33 39.97 40.56 Payables Turnover 96.27 116.35 107.17 119.14 124.62 Gearing Ratio 0.69 0.79 0.86 0.84 0.74 Debt to Equity -0.76 -0.21 0.01 -0.03 -0.43 Interest Cover 25.44 27.92 57.19 32.93 21.16

Appendix 3 British American Tobacco’s Expansion Efforts (BAT, 2019b)